Speech by SEC Commissioner:
Remarks at the 2010 SEC Government-Business Forum on Small Business Capital Formation

by

Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Washington, D.C.
November 18, 2010

Thank you for the kind introduction. I am very pleased to welcome you — whether you are with us in Washington or participating by Webcast — to the "2010 SEC Government-Business Forum on Small Business Capital Formation." This Forum provides an important opportunity for the private sector and government to examine how best to promote small business. The stakes are considerable. For we all stand to gain from the new jobs, innovative ideas, and vigorous competition that enhance our standard of living when entrepreneurism flourishes and smaller enterprises thrive.

It is gratifying to see that, once again, we have been fortunate enough to bring together an impressive group of individuals to share their ideas, perspectives, and experiences on this topic, which is of such great significance to our economy. I want to thank all of those at the SEC — most notably, Gerald Laporte and Meredith Cross — for their efforts in organizing this event. I also want to thank our distinguished panelists for making time in their busy schedules to participate today.

Before this gathering gets underway, I would like to take a few moments to offer some personal thoughts — thoughts that I hope complement what you will hear from the panelists and that provide a further glimpse into why I think we need to place greater emphasis on encouraging small business. I should underscore that my personal views do not necessarily reflect those of the SEC or any of my colleagues on the Commission.

* * *

Small business fuels economic growth, generating valuable opportunities for investors, entrepreneurs, employees, and consumers. Startups and maturing enterprises drive innovation, provide opportunities for investors to earn higher returns and accumulate wealth, and spur job creation. Companies that today are household names can trace their origins to entrepreneurs and innovators of earlier periods who had the wherewithal and backing to start and grow a business.

In providing our economy with cutting-edge goods and services, new and smaller companies in turn pressure more established firms to run themselves more effectively. The market discipline of competition, in other words, holds larger incumbent enterprises accountable. Not only do we benefit from the range of innovative products, productivity gains, and new jobs that small businesses offer, but we benefit because larger firms must be even more responsive to the demands of stakeholders to remain competitive.

This is only part of the picture, however. Smaller companies also face distinct challenges and hurdles, some of which are rooted in regulatory requirements that can unduly burden small business. The out-of-pocket financial cost of complying with regulatory obligations can be difficult to bear. In addition, regulatory compliance requires a commitment of time and effort that otherwise could be dedicated to running the business; smaller enterprises may not have excess human resources to distract from day-to-day operations. Put simply, the disproportionate strain of regulation on small business can create a barrier to entry or expansion. It is important to keep this in mind during our rulemakings because more established firms might not resist regulatory demands that they can bear but that the larger firms' smaller competitors cannot similarly shoulder. Hearing from small business during the rulemaking process, therefore, can be very instructive.

The practical challenge for securities regulators is to strike a balance that avoids unduly stifling the formation and fostering of new and smaller businesses. Drawing appropriate regulatory distinctions — such as between smaller and larger firms — and scaling regulatory demands accordingly helps strikes this balance by guarding against overburdening enterprises that do not present the kinds of concerns that, on balance, may warrant more costly regulation and for which the costs of regulation may prove to be disproportionate. Put differently, rejecting a one-size-fits-all regulatory approach when possible in favor of calibrating the securities law regime to account for different cost-benefit tradeoffs under different circumstances is prudent.

This basic intuition undergirds the following counsel that I take as a member of this agency — namely, that the SEC should actively consider ideas for tailoring securities regulation to ensure a measured approach is taken with respect to smaller enterprises so that we do not lose out on the benefits their activities offer us. When it comes to capital formation in particular, investors can benefit when the regulatory regime is tailored to provide smaller companies prudent relief from undue regulatory demands. Efficient capital formation, for example, not only benefits the companies raising funds, but can provide investors with more attractive investment opportunities.

* * *

Fortunately, the federal securities laws have long recognized the need to be measured, as there is a tradition of scaling federal securities regulation in important respects to provide small businesses relief from select burdens that may be especially onerous for them. But more can and should be done to refine the regulatory framework to better fit the regime to firms of different sizes and at different stages in their lifecycles.

It is in the advancement of this effort that the Commission has convened this Forum annually since 1982. Today's panels and discussions promise to be informative and dynamic — just as they are every year. The morning's first panel will discuss how certain provisions of Dodd-Frank could impact small business. From the second panel, you will hear a range of insights and observations on small business capital formation from a host of interested parties. This afternoon, breakout groups will engage such topics as private placement and M&A brokers, private offerings, and the regulation of smaller public companies — all important topics of discussion.

Discussing these and other topics is a good start. My hope, however, is that as an agency, the Commission will move beyond talking about small business capital formation and will take additional concrete steps that actually foster it.

Again, thank you for participating in the 2010 Forum. I look forward to reviewing your recommendations and to reading the report that the SEC staff will prepare on the day's proceedings.